- StoneMor Partners L.P. is the only publicly-traded death-care MLP.
- STON has been losing money over the past 5 years using GAAP accounting.
- At some time in the near future, cash flow and unit payout must meet.
StoneMor Partners L.P. (NYSE:STON) is the only publicly-traded death-care company structured as an MLP. It is the second largest owner and operator of cemeteries in the U.S. At the end of 2013 it owned and operated 367 and has added 9 funeral homes and 25 cemeteries over the past 6 months. Larry Miller, President and CEO, maintains that these additional properties will be immediately accretive to unit holders.
StoneMor is currently selling for around $24.00 to $24.50 per unit. The partnership units have been yielding $2.40 per unit, which is close to 10%. It had an EPS of -$0.75 last year and has not made money, according to GAAP for the last 5 years: 2012 -$0.15, 2011 -$0.50, 2010 -$0.10 and 2009 -$0.09 (taken from S&P). These facts beg one to ask, where does the money come from to pay the $2.40 per unit? Cash flow has not provided the funds to pay the distributions for the past 2 years: -$0.09 for 2013 and $0.33 for 2012. It appears that the cash to pay these distributions has come from borrowings and/or increasing long-term debt. Long-term debt has grown from $186 million in 2009 to $289 million in 2013.
Increasing debt and EPS losses does not complete the story. StoneMor has been a major consolidator of the death-care business. It has been purchasing cemeteries and funeral homes over the past 10 years. In order to finance this expansion, the partnership has also been offering common units. The partnership just sold 2.6 million additional units in May just after it sold 2 million units in February. The general partner also received $55 million from a private investment firm. Reading through the annual report left me clueless as to the value of the enterprise. Several things did stand out; the company is required to keep money separate for pre-sales of funerals. It must also keep money separate for maintaining the cemeteries on a perpetual basis.
It is also noteworthy to recognize that the only way for the partnership to increase sales is to increase the number of facilities it owns. STON stated that the business of handling death is reasonably steady but also noted that a greater percentage of customers are choosing cremation instead of interment. Since sales and profits are lower from cremation than traditional burials, income per facility is decreasing rather than increasing because of customers turning to cremation.
The Street maintains a hold on STON. It said that the market expects the partnership to improve earnings this year from -$0.88 to -$0.22. While the gross profit margin is rather high at 52.65%, the net profit margin of 0.63% significantly trails the industry average.
The Street also reported that cash flow decreased to -$2.94 million, a decrease of 142% from the same quarter last year. Ford also maintains a hold on STON for many of the same reasons. A hold means that these rating agencies expect the common units to move in line with the market over the next 6 -12 months.
The main goal of my research on this partnership was to ascertain that it could continue to pay the 10% dividend since these units were contained in several of my managed accounts. The partnership appears to be in a dilemma between continuing this 10% payout to keep the price of the units up so it can issue more units at a reasonable price, or to reduce the payout in order to bring the payout in line with its decreasing cash flow. Since the partnership must keep offering new units to continue its rapid expansion and to pay off loans coming due over the next 3 years, I believe that the partnership will attempt to maintain the present payout for a while. At some point, however, there must be a reckoning between the partnership's decreasing cash flow and its high payout. It appears inevitable that within the next 2-3 years the payout of these units must fall considerably for the partnership to conserve cash to meet its debt obligations and to bring its distributions in line with available cash. When and if that occurs, the price of the units will fall along with the distribution.
Additional disclosure: I recently held positions in StoneMor, but after reading the annual report and doing further research, decided to sell all shares.